A Three-Tiered Solution For Puerto Rico

By JARED BERNSTEIN

Dec 16, 2017 | 6:00 AM

Mercedes Ramos discusses how the hurricane has affected her and her family.

The people of Puerto Rico — who are, of course, U.S. citizens — have been and remain in very serious trouble. Their economy was already stalled before their debt crisis revealed their unsustainable financial situation. Then, Hurricane Maria led to a humanitarian crisis that persists to this day, and much of the island remains without electricity almost three months after the storm. It is unimaginable that such devastation would go unaddressed in any state in our union.

It will take a three-tiered approach to address a challenge of this magnitude: First, immediate disaster relief, health support and debt forgiveness. Second, a multiyear commitment to rebuild. Third, a long-term growth plan.

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Each step is equally vital. Without straightforward, complete debt relief (which should occur in court, as established by recent legislation that created this option), the island will be stuck in the fatal vice grip of this perilous inequality: debt growth greater than income growth. Without a commitment to rebuild, Puerto Rico will have no economic infrastructure to support the third part of the plan: a growth agenda.

Starting with Step 1, Puerto Rico's health-care safety net is structured in precisely the wrong way to meet the current crisis. As health-policy expert Edwin Park points out, Medicaid funding is provided through a "highly inadequate block grant — a fixed amount of federal funding that falls well below ... actual Medicaid costs." In the states, the federal government helps pay for Medicaid through match rates based on state per capita income compared to that of the nation. If that fair-minded policy were applied in Puerto Rico, the match rate would be 83 percent. Instead, it's fixed at 55 percent; any spending above that level falls to Puerto Rico itself, an unsustainable policy even before Maria.

The island gets added funding for Medicaid through the Affordable Care Act, but those resources are also just about used up. Park warns that "without any additional funding ... Puerto Rico will likely have to remove up to 900,000 people from Medicaid (more than half of its total enrollment)." A timely vehicle for this support would be the continuing budget resolution on which the Congress is actively working to keep the government running, but early reports suggest there's far too little support for Puerto Rico's Medicaid program in the bill, and no increase in the match rate, which should definitely be set at 100 percent for now.

Regarding Step 2, given the severe damage to their electrical grid, roads, businesses, hospitals and housing, disaster relief is also urgently needed. In the spirit of viewing a crisis as an opportunity, a detailed, multiyear plan to renovate the island's infrastructure could help trigger economic activity and jobs. For this step, while outside resources, including labor, will be necessary, it is essential that Puerto Ricans themselves have a chance to contribute to repairing their homeland.

The politicians overseeing these efforts must recognize how counterproductive the imposition of any fiscal austerity, program cuts or complicated debt resolution arrangements are on the future of the island. These measures can only exacerbate the ongoing out-migration of Puerto Rico's working-age population, as they tend to be more mobile than retirees. Not only does such out-migration foreclose any growth prospects, it assures that citizens who can't access safety-net programs on the island will simply get them on the mainland. There are thus no cost savings here, just shortsighted punishment meted out for past misdeeds and for the sin of being in the path of a vicious storm.

In terms of Step 3, a growth agenda, we cannot know at this point what sectors might grow in the future, though we can know that growth is conditional on Steps 1 and 2 (immediate relief and a longer-term rebuild). Compared to other islands in the Caribbean, Puerto Rico hosts too little travel and tourism. Its share of employment in these sectors is 2 percent (the same as Cuba's) compared to 27 percent in the Bahamas and 8 percent in Jamaica, suggesting some opportunity to tap in that space. It's a good example of how any future opportunity is dependent on what happens next to meet current challenges.

While I admit that setting up commissions is what you do when you don't know what else to do, this idea for a growth commission from the smart and seasoned Puerto Rican think tank Center for a New Economy is a good one. The center has long observed and critiqued Puerto Rico's descent into over-indebtedness, negative growth and poor governance. Unlike outsiders tasked with figuring out the island's fate, it has a strong presence and street cred on the ground. Its ideas for identifying sectoral opportunities, developing human capital and energy resources, and reforming the fiscal system are exactly the right place to start.

Meeting the challenges faced by Puerto Rico are uniquely difficult. The formula we're trying to solve here is a debt crisis plus a weather disaster minus a previously healthy growing economy. Moreover, when a country goes through a process like this, it often has an automatic relief valve: currency devaluation supporting exports. Of course, that's not the case here.

Instead, the three-step process I've described is one that demands a level of political focus and intention that almost certainly goes beyond the capacity of our current Congress. Add to the island's problems that the people are going through all of this during a period of political dysfunction. Still, there is a path forward; this is not insolvable. We have the way. The question is: Do we have the will?

Jared Bernstein, a former chief economist to Vice President Joe Biden, is a senior fellow at the Center on Budget and Policy Priorities. He wrote this for The Washington Post, where it first appeared.